Evening Market Update

Traders Cautious Heading into Earnings Season

Stocks finished mixed and little changed as the trading session was met with some caution ahead of the beginning of 1Q earnings season, which unofficially started after the closing bell with Dow member Alcoa reporting a profit that was a penny ahead of forecasts. Also keeping conviction in check was a dormant economic calendar that doesn’t heat up until later in the week. Crude oil prices fell solidly after Libya’s embattled leader Qaddafi reportedly agreed to a cease fire, and over demand concerns after the IMF downgraded its economic growth forecasts for the US and the world. M&A activity dominated news on the equity front, as NYSE Euronext reported that it has rejected the joint proposal by NASDAQ OMX Group and IntercontinentalExchange, Endo Pharmaceuticals Holdings said it will acquire American Medical Systems Holdings for $2.9 billion in cash, and Level 3 Communications inked a deal to purchase Global Crossing Limited for about $1.9 billion. In other equity news, Tenet Healthcare filed suit against its rival and unsolicited bidder Community Health Systems over alleged Medicare billing improprieties. Treasuries finished the day unchanged.

The Dow Jones Industrial Average inched 1 point higher to 12,381, the S&P 500 Index fell 3 points (0.3%) to 1,324, and the Nasdaq Composite declined 9 points (0.3%) to 2,772. In moderate volume, 819 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.87 to $109.92 per barrel, wholesale gasoline lost $0.06 to $3.20 per gallon, and the Bloomberg gold spot price declined $12.00 to $1,462.91 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.3% higher at 75.05.

After the closing bell, 1Q earnings season unofficially kicked off after Alcoa (AA $18) reported a profit of $0.28 per share ex-items, a penny above the Reuters forecast, on revenues of $5.96 billion, which fell short of expectations of $6.07 billion.

In M&A news,  NYSE Euronext (NYX $38) announced that its Board of Directors has unanimously rejected the unsolicited joint proposal by NASDAQ OMX Group Inc. (NDAQ $28) and IntercontinentalExchange (ICE $121) to acquire NYX. The company said the proposal by NDAQ and ICE is “strategically unattractive,” and comes with “unacceptable execution risk.” NYX also reaffirmed its commitment to the previously agreed merger with Deutsche Boerse (DBOEY $8). NDAQ and ICE responded by saying that NYX, without engaging in any dialogue or discussion, has summarily elected to deny stockholders the opportunity to benefit from a “clearly superior proposal” to DBOEY’s announced transaction, “a proposed transaction that is indisputably financially inferior.” NYX, ICE and NDAQ were lower, while DBOEY traded modestly higher.
In other dealmaking news,  Endo Pharmaceuticals Holdings Inc. (ENDP $41) announced that it has entered into a definitive agreement to acquire American Medical Systems Holdings Inc. (AMMD $30) for $30 per share, or $2.9 billion in cash, including debt. ENDP said the combined company will be positioned to deliver more comprehensive healthcare solutions in branded pharmaceuticals, generics and devices and services, and in key therapeutic areas of urology and pain. ENDP was nicely higher, while AMMD was up over 30%.

Elsewhere, Level 3 Communications Inc. (LVLT $2) announced that it has reached a definitive agreement to acquire Global Crossing Limited (GLBC $25) in a stock-for-stock transaction valued at about $23.04 per GLBC share, or about $1.9 billion, excluding $1.1 billion in debt. Under the terms of the deal, GLBC shareholders will receive 16 shares of LVLT stock for each share they own. Shares of both companies were sharply higher.

Tenet Healthcare Corp. (THC $6) filed a federal lawsuit against rival Community Health Systems Inc. (CYH $25), accusing the hospital operator of overbilling Medicare. CYH had made an unsolicited $6 per share, $3.3 billion bid for THC late last year, an offer THC has said was inadequate. CYH released a press statement saying that it will vigorously defend itself against the “unfounded and irresponsible claims”, adding that the allegations are “…an attempt by Tenet’s management and board to continue their entrenchment strategy and to distract Tenet shareholders” from its pending offer. Shares of both companies fell solidly on the news, with THC off over 14% and CYH down over 38%.

Economic calendar dormant, heats up in the second half of the week

Treasuries finished flat as there were no major economic reports due out today. The yields on the 2-year note, the 10-year note and the 30-year bond were all unchanged at 0.82%, 3.58% and 4.65%, respectively.

Major US economic releases begin Wednesday, with advance retail sales and the Federal Reserve Beige Book being reported. However, inflation readings released later in the week will likely headline the economic calendar, given the growing concerns about higher prices as commodities are rallying and the debate regarding the Fed’s current bond-buying program, known as QE2. Thursday will bring the release of the Producer Price Index (PPI), expected to show prices at the wholesale level rose 1.0% m/m in March, while the core rate, which excludes food and energy, is expected to increase 0.2%, the same pace as February. The release precedes Friday’s Consumer Price Index (CPI) report, forecasted to show a 0.5% m/m increase, while ex-food and energy, it is expected to again rise 0.2%.

The potential for inflation is a key point of disagreement and uncertainty for many investors. While this week’s core inflation readings are likely to continue to show levels below the Fed’s longer-term inflation “target” for a balanced economy, the question is whether very accommodative monetary policy continues to be necessary with the economy showing continued recovery. As inflation tends to lag economic growth and monetary policy needs time to work, monetary policy may need to be adjusted before inflation pressures rear their head.

Tomorrow’s US economic calendar will provide only the Import Price Index, forecast to rise 2.0% m/m during March, following a 1.4% increase in February, as well as the NFIB Small Business Optimism Index.

Economic news overseas light

The economic calendar in Europe offered only some slightly smaller-than-forecasted increases in industrial production in the euro-area, with Italy and France both posting m/m gains in output that missed economists’ forecasts. Elsewhere, a UK government-appointed commission released a report on the banking structure in the nation, which was met with some relief as the report did not recommend the separation of retail and investment banking business, per Bloomberg.

In Asia, India’s industrial production unexpectedly slowed in February, while China reported a surprising trade surplus for March, as exports jumped 35.8%, but the surplus was modest as imports also rose solidly, increasing 27.3%. Also, Chinese Premier Wen Jiabao offered comments on controlling rising real estate prices, while noting that stabilizing consumer prices was a top priority, per Bloomberg.

Gracing the international economic calendar tomorrow will be CPI and the Zew Economic Sentiment Survey from Germany, and CPI from Spain, while further east, Japan will report machine tool orders, South Korea will announce its unemployment rate, and Australia will release consumer confidence. In North America, the Bank of Canada will conclude its monetary policy meeting where it is expected to keep its overnight target rate unchanged at 1.00%.